The DOJ said in a release that WesCorp collapsed after suffering massive losses on RMBS and CDOs rated by S&P. The Justice Department said to date, federally insured financial institutions have suffered more than $5 billion in losses in connection with the failure of CDOs rated by S&P from March to October 2007.

The suit was filed Monday in U.S. District Court in Los Angeles.

“Significant harm was caused by S&P’s alleged conduct in the Central District of California,” said U.S. Attorney André Birotte Jr. “Institutional investors located in my district, such as WesCorp, suffered massive losses after putting billions of dollars into RMBS and CDOs that received flawed and inflated ratings from S&P.”

The lawsuit alleges that S&P issued inflated ratings that misrepresented the securities’ true credit risks. The complaint also alleges that S&P falsely represented its ratings as objective, independent and uninfluenced by S&P’s relationships with investment banks when, in actuality, S&P’s desire for increased revenue and market share led it to favor the interests of these banks over investors.

“Put simply, this alleged conduct is egregious – and it goes to the very heart of the recent financial crisis,” said U.S. Attorney General Eric Holder. “Today’s action is an important step forward in our ongoing efforts to investigate – and – punish the conduct that is believed to have contributed to the worst economic crisis in recent history. It is just the latest example of the critical work that the President’s Financial Fraud Enforcement Task Force is making possible.”

Joining the Justice Department were attorneys general from California, Connecticut, Delaware, the District of Columbia, Illinois, Iowa and Mississippi, who have filed or said they will file civil fraud lawsuits against S&P alleging similar ratings misconduct.

After WesCorp was seized by the NCUA on March 20, 2009, WesCorp member credit unions were forced to write off all paid-in capital and member capital accounts which totaled $1.14 billion as of Jan. 31, 2009.

At the time, Director of Office of Examinations and Insurance Melinda Love said the WesCorp losses forced 90 member credit unions below 7% net worth.

Federally insured credit unions are still repaying the cost to securitize corporate legacy assets. In November 2012, the NCUA estimated the annual corporate assessments to total between $6 billion and $8.9 billion by the time the corporate stabilization fund expires in 2012. WesCorp accounted for a majority of corporate losses.